Paddy Power and the bondholders

County View

John Healy

Ajai Chopra was back in Ireland recently, to attend the banking inquiry. Mr Chopra was the more amiable of the three horsemen of the Troika which had been sent here to help us sort out our financial mess. It was, someone said, almost like welcoming back an old friend. Ajai had got to like us, and we him.
On his original mission, Ajai had represented the IMF, the International Monetary Fund leg of the Troika, the others being the European Commission and the European Central Bank. He is now retired, and so was able to speak more freely and express his views more candidly to the banking inquiry. The nub of what he had to say was that the Irish public was appallingly treated by the Troika’s insistence that the reckless investors in the failed Irish banks - otherwise known as the bondholders - be refunded their money in full out of the pockets of the Irish taxpayer.
To put it in context, being an unsecured bondholder is a fancy term for someone who takes a risk on a private investment. It is the financial market’s equivalent of going into Paddy Power’s to place a wager on your chosen nag. The difference is that if your nag trails in at the end of the field, Paddy Power won’t give you your money back. Nor would you even think of asking. In the case of the bondholders, however, when Anglo and Irish Nationwide went bust, we - the Irish taxpayer - were forced by the ECB into dishing out the €8 billion to compensate them for their loss.
Chopra told the banking inquiry that the IMF had seen the payouts to these unsecured creditors as being unfair and illogical. It was, he said, a burden on the Irish people which never should have been countenanced. The proposal was roundly opposed within the Troika by the IMF team, but their views were over ruled at political level in Brussels and Frankfurt. No other country had ever been asked to pick up the tab to pay off bondholders to whom we were not legally obliged to pay a penny.
There is little doubt but that our domestic political leaders were cajoled, then arm twisted, and finally bullied by threats of the direst consequences if they refused to bend the knee and do the bidding of Brussels - that is, compensate the bondholders for their losses. Both the Taoiseach and the Minister for Finance had, quite correctly, decided that there was no moral or legal imperative to compensate those who had wagered on the bust banks, and lost. But then, only hours before he was due to confirm to the Dáil that the official stance was to be that the bondholders were to be burned (as the phraseology went), Michael Noonan received a phone call from the ECB. Whatever threats were made had the desired effect. The Irish people would, after all, cough up the €8 billion so that the bondholders would not be out of pocket.
Quite what the argument was in favour of payment is hard to define, except that the ECB was hell bent on ensuring that the only one to take the hit would be the Irish taxpayer. The inverted logic seemed to be that, if we declined to recompense the investors in what were failed private banks, our credit worthiness would be damaged, and nobody would lend to us as a nation ever again.The solution was that we borrow even more money, pay it out to people with no legal claim to it, and thus ensure that our creditors would have no hesitation in lending to us again in the future.